Franchise is a continuing relationship between the parent company (called the franchiser) and an

individual business unit (called the franchisee); under which the parent company provides a licensed
privilege to the business unit to use its trade mark, in return for a royalty payment made to the parent
company.

Salient Features of Franchise:

(i) Franchise relationship is based on an agreement; which lays down terms and conditions of
this relationship.
(ii) The term of franchise may be for 5 years or more; and the franchise agreement may be
renewed with the mutual consent of both the parties.
(iii) The franchisee gives an undertaking not to carry on other competing business during the
term of the franchise; and the franchiser gives an undertaking not to terminate the franchise
agreement before its expiry except under situations which may justify the termination of the
franchise agreement.
(iv) The franchisee agrees to pay specified royalty to the franchiser, as per terms of the franchise
agreement.
(v) Franchise means selling the same product and maintaining a similar type of shop decor (i.e.
style of interior decoration); for which franchiser provides assistance to franchisee in
organising, merchandising and management. The franchiser virtually sets up the business for
the franchisee.
(vi) Franchisee is supposed to follow parent company’s policies regarding mode of business
operations, as per clauses in the franchise agreement.
(vii) Franchiser may give training to personnel working in the franchisee’s organization.

Merits of Franchise:
From the Viewpoint of the Franchiser:

(i) Expansion of Business:

The franchiser is able to expand his business, and gain wider acceptance of his brand name or
trademark, because of franchise agreement. The franchiser can enter into foreign markets also and
enhance his goodwill and business.

(ii) Regular Income:

The franchiser receives a regular income by way of royalty from the franchisee at no extra cost; as cost of
new premises and extra staff is borne by the franchisee.

(iii) Economical Advertising:

Advertising done by the franchiser benefits the franchisee also. Thus, under franchise, advertising proves
very economical, in the long-run.

(iv) Advantage of Market Feedback:

The franchiser gets market feedback about product popularity, needs, preference of local customers
from the franchisees.
From the Viewpoint of the Franchisee:
(i) Little Investment Needed:
The franchisee can start business with lesser investment than would be required had he to start an
independent business of his own.

(ii) Advantage of Goodwill to Franchisee:

Franchisee gets the immense advantage of the goodwill created by the franchiser. Higher success rate is
found in cases of franchise; as the franchisee averts the risk of starting a new business of his own and
gets an income higher than possible from his own independent business.

(iii) Management Assistance etc.:

The Franchiser provides may types of assistance to franchisee like:
(a) Store lay-out guidance
(b)Training to personnel
(c) Marketing support
(d)Financial assistance etc.

(iv) Advantage of research and development:

The parent company makes huge investment in research, innovations etc.; the advantage of which goes
to franchisee in the normal course of functioning of business.

Limitations of Franchise:
From the Viewpoint of the Franchiser:

(i) Danger of image tarnishing:

If the franchisee does not maintain standards of quality and service; there is a danger that the goodwill
and image of the reputed franchiser is tarnished.

(ii) Problems and costs for the franchiser:

In franchise, the franchiser faces many problems and costs like:
(a) Vocal and demanding attitude of franchisee
(b) Problems and costs of communicating with franchisees located at distant places
(c) Costs of training, financing and advertising, done for the franchisees.

From the Viewpoint of the Franchisee:

(i) Lack of freedom:
The franchisee does not have the freedom to run his business in an independent manner. He has to
abide by management and operational policies of the franchiser – whether suitable to him or not.
(ii) Limited range of products:
The franchisee cannot introduce new products in his business; except those permitted by franchiser. This
may mean loss of business to franchisee amidst local conditions surrounding his business.
(iii) Fixed royalty payment:
The franchisee has to make payment of royalty to the franchiser on a regular basis. This considerably
reduces the income of the franchisee.